• The dollar bounces as stocks slip since last week- Bubble-like activity in stocks
  • The dollar index continues to slip
  • Gold moved a touch higher, but silver, platinum, and palladium edge lower
  • Energy prices mostly lower, but crack spreads recover
  • Weakness in most agricultural commodities continues

 

Summary and highlights:

 

On Thursday, June 11, the stock market tanked in the worst move to the downside since March. The Chairman of the Fed warned markets of challenges on June 10 when the central bank said that short-term rates would remain at zero percent through 2022. He also said the Fed is not even “considering considering rate hikes at this time.” The DJIA fell 6.90% or over 1860 points on the session. The S&P 500 dropped 5.89%, with a loss of 5.27% on the NASDAQ. The tech-heavy NASDAQ reached the 10,000 level and a record high on June 10 and cratered lower on June 11. The Russell 2000 lost 7.58% as small-cap stocks did worse than the other leading indices. Risk-off was back on again in markets. September 30-Year US Treasury bonds were 2-03 higher to 178-00 in flight to quality buying. The June dollar index bounced to 96.739, up 0.789 on the session. The USDA released its June WASDE report on Thursday. The full report is available through this link. Corn settled 3.5 cents per bushel higher, while July soybeans posted only a one-half cents per bushel gain. July wheat fell 7.0 cents to just below the $5 per bushel level. Crude oil tanked with the stock market as July NYMEX futures fell $3.26 per barrel to $36.34. August Brent was down $3.25 to $38.48. Heating oil and gasoline futures fell sharply with the price of petroleum. Natural gas edged 3.3 cents higher to $1.813 on the July contract after the EIA reported that inventories in storage rose by 93 bcf for the week ending on June 5. July ethanol futures fell with gasoline and were at the $1.19 per gallon level. Gold moved higher, gaining $19.10 on the session with silver up just under 10 cents per ounce on its settlement price. Platinum and palladium prices both fell just over $20 per ounce. July copper futures were 7.0 cents per pound lower at $2.5865 per pound. August live and feeder cattle prices drifted lower along with August lean hogs. FCOJ was higher, but cotton, coffee, sugar, cocoa, and lumber prices all moved to the downside. Even though gold was higher, Bitcoin fell $570 to $9365 per token. The mirage in the stock market and many other asset classes ran out of steam on the upside as optimism declined and selling returned on June 11.

On Friday, stocks made a bit of a comeback. The Russell 2000 gained 2.32%, while the DJIA, S&P 500, and NASDAQ were up between 1% and 2%. The September 30-Yar Treasury Bond fell 1-10 to 177-01. The June dollar index moved higher to settle at 97.305. Corn gained only 0.25 cents, while soybean futures were 5.25 cents higher. CBOT wheat was 2.75 cents higher, pushing the grain back over the $5 per bushel level on the July futures contract. NYMEX crude oil was marginally lower to settle at $36.26 on the July contract. Gasoline and heating oil futures posted marginal gains, pushing the crack spreads higher. July natural gas slipped 8.2 cents to $1.731 per MMBtu. Gold and silver backed off along with platinum, while palladium moved to the upside. Copper settled a bit higher at $2.60 per pound on the July contract. Live and feeder cattle and lean hog futures in August moved lower on Friday. Cocoa and lumber prices posted gains, but cotton, FCOJ, coffee, and sugar prices fell. Bitcoin was $205 higher to $9505 per token.

On Monday, stocks were volatile. After moving lower early, news that the Fed would purchase corporate bonds lifted stocks from the worst levels of the day. All of the leading indices wound up with gains on the session with the Russell 2000 leading the way on the upside with a 2.30% gain. NASDAQ was 1.43% higher, and the S&P 500 gained 0.83%. The DJIA moved 0.62% to the upside. The September 30-Year US Treasury bond fell 0-11 to 176-28. September dollar index futures ere 0.680 lower to 96.650. July wheat futures gained 2.75%, but corn and soybeans fell 0.75 and 2.25 cents per bushel on the session. July crude oil futures on NYMEX gained 86 cents to $37.12 per barrel. Gasoline and heating oil futures outperformed the crude oil, pushing crack spreads higher on Monday. Natural gas in July fell 6.2 cents per MMBtu to $1.669 after making a lower low at $1.661. Ethanol fell 7.1 cents per gallon to $1.127. Gold was around $10 lower and sell fell 8.3 cents per ounce. Platinum gained $2.70 to just over $820 per ounce, and palladium was $5.40 lower to $1933.10. July copper futures on COMEX settled 3.3 cents lower at $2.5670 per pound. Cattle and hog futures posted marginal gains of under one cent per pound on all of the August futures contracts. Sugar and lumber edged to the upside, but cotton, FCOJ, coffee, and cocoa prices dropped. Bitcoin moved $50 per token higher to $9515.

On Tuesday, in welcome news for the US economy, retail sales rose by a seasonally adjusted 17.7% in May from a month earlier. The news lifted the stock market on Tuesday. The DJIA rose 2.04% while the S&P 500 gained 1.90%. The NASDAQ added 1.75%, and the Russell 2000 posted a 2.30% gain. September US 30-Year Treasury bonds were 1-18 lower to 175-24, while the dollar index moved 0.283 higher to 96.933 on the September contract. Grains were lower on Tuesday. Corn only fell 0.25 cents, with July soybeans down 2.0 cents per bushel. CBOT wheat futures in July fell 8.75 cents, and back below the $5 per bushel level. NYMEX crude oil was $1.26 per barrel higher to $38.38, with Brent up slightly more to around the $41 per barrel level. Gasoline and heating oil futures moved higher, pushing crack spreads a bit higher on the session. All of the four precious metals posted gains with gold, silver, platinum, and palladium prices moving higher. Copper was little changed at $2.5645 on the July contract. August live and feeder cattle prices rose, but August lean hogs fell. Cotton, sugar, cocoa, and lumber were higher, while FCOJ and coffee prices fell. Bitcoin was $90 per token higher to $9530 per token.

On Wednesday, stocks were mixed as Fed Chairman Powell testified before Congress and pledged a continuation of accommodation. He encouraged legislators to increase fiscal stimulus during the current challenging period. The DJIA was down 0.65%, with NASDAQ gaining 0.15%. The S&P 500 moved 0.36% to the downside, and the Russell 2000 finished with a 1.77% loss. September US 30-Year Treasury bond futures were 0-18 higher to 176.08. The September dollar index climbed 0.211 points to 97.144. Corn and soybeans moved higher, but wheat fell to a new low on the session. Crude oil edged a little lower, and products outperformed the raw energy commodity, causing crack spreads to move higher. The EIA data on Wednesday was far more constructive than the API data on Tuesday. The 500,000 bpd decline in daily US output could wind up being a supportive factor for the price of crude oil. Natural gas was a few cents higher and remained above the $1.60 per MMBtu level on Wednesday. Ethanol futures moved higher on the session. Silver was a bit higher, but gold posted a marginal loss. Platinum and palladium moved a touch lower, and copper moved higher towards the $2.60 per pound level on July futures. Cattle and hog prices moved marginally higher on the session. Cocoa and sugar prices moved to the downside, while cotton, FCOJ, coffee, and lumber moved higher on Wednesday. Bitcoin fell around $115 to $9415 per token.

 

Weekly Spreadsheet:

Copy of Spreadsheets for The Hecht Commodity Report June 17, 2020

 

Stocks and Bonds

I wrote that the move in the stock market was likely a mirage as the global pandemic did not end, and the US is facing social problems. As pockets of outbreaks of coronavirus broke out again last week, the stock market moved lower. We should continue to expect periods of extreme volatility throughout 2020 as the US has the added risk of the upcoming Presidential election. The contest between President Trump and former Vice President Joe Biden will determine the future of tax, regulatory, energy, and social policies. Any shutdowns of businesses because of the virus could sent stocks lower in a hurry. The recovery was V-shaped in the stock market, but now it is looking more like a check market as selling has returned to the markets. I continue to believe that the current level of the stock market is more than inflated and that the odds favor the downside in the coming weeks and months.

The S&P 500 fell 2.40% since last week. The NASDAQ was 1.10% lower after reaching a new record above 10,000, and the DJIA posted a 3.22% loss. Wide swings in stock prices create trading opportunities, but they are a nightmare for investors.

Last week’s Fed meeting told us that the central bank is prepared to leave the short-term Fed Funds rate at zero percent through 2022 and is ready to add unlimited liquidity to stabilize the economy.

Chinese stocks fell with US stocks over the past week. China has reported an increase in cases, but the data remains more than dubious.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $40.12 level on Wednesday, as it fell by 3.46% since the previous report. The Chinese large-cap ETF product was flirting with the $40 per share level again. Support is at the March low at $33.10 with resistance at $41.65, the June high before the most recent correction.

September US 30-Year bonds eased higher over the past week. Interest rates in the US are not moving appreciably higher any time soon because of the level of stimulus, as the Fed said last week. On Wednesday, June 17, the September long bond futures contract was at the 176-08 level, 0.07% higher than on June 10. Short-term support for the long bond is at 170-30 with resistance at 180-28. The bonds moved higher after the latest Fed meeting, and as the stock market declined over the past week.

Open interest in the E-Mini S&P 500 futures contracts rose by 6.18% since June 9. Open interest in the long bond futures rose 0.71% over the past week. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. Last week I wrote, “I continue to believe that risk-reward favors buying the VIX and VIX-related products with tight stops and reestablishing positions after the market triggers stops is the optimal approach in the current environment. Nothing has altered my approach to the VIX over the past week.” I have traded from the long side over the past week. The volatility index was at 33.57 on June 17, up 21.45% on the week.

At below 28, the VIX was highly attractive. I continue to trade related products like VIXX, and VIXY are short-term trading tools. I had been trading the VIX and related products from the long side, taking marginal losses with tight stops. Over the past week, those small losses turned into significant profits as the VIX peaked at 44.44 on June 15. I will continue to buy VIXY or VIXX on dips when the volatility index falls. These are short-term trading instruments, so I use very tight stops and re-enter on the long side at lower levels after the markets trigger stops. I have let profits run but stopped losses quickly.

The market reacted precisely as I projected, with selling returning. Stocks had moved too high, given the many issues that continue to face markets across all asset classes. Volatility is likely to continue. The market has trained investors to buy stocks on every dip, so we could see another recovery, but the increase in uncertainty over the virus could cause sudden downdrafts as we witnessed over the past week. Until there is a proven therapy or vaccine that removes the threat of the virus to the overall economy, we are likely to experience a bumpy road in the stock market. Moreover, the US election in November could weigh on the stock market if corporate taxes are going to rise and the regulatory environment becomes more onerous. The stock market has become more bubble-like with shares of bankrupt companies like Hertz rallying sharply. I view this as a warning sign for the overall market. At the same time, Warren Buffett and other high-profile investors are not buying stocks in the current environment, which is another reason for extreme caution about values.

 

The dollar and digital currencies

The dollar strengthened over the past week as the stock market fell. The dollar attracted flight to quality buying, which sent the dollar index higher than its closing level on June 10. The currency futures rolled from June to September over the past week.

The September dollar index future contract was at 97.144 on June 17, up 1.30% from the level on June 10. The dollar is still the world’s reserve currency. During periods of uncertainty, market participants tend to flock to the greenback, as we witnessed when the stock market turned lower over the past week. Open interest in the dollar index futures contract moved 41.45% lower since June 9 after an over 30% gain last week. As June dollar index futures rolled to September, many market participants exited risk positions. A move below the 94.61 level would threaten the long-term uptrend in the dollar index. Daily historical volatility in the dollar index rose from 3.77% last week to 6.86% on Wednesday. The metric that measures price variance on the September contract rose to a high of 22.70% in late March.

The September euro currency was 1.44% lower against the dollar. The interest rate differential between the dollar and the euro has narrowed, which provides some support for the euro. Open interest in the euro futures fell by 3.03%. The September pound moved 1.79% lower against the dollar since last week, and open interest moved 10.13% lower. The dollar is not out of the woods on the downside, but governments around the globe tend to intervene in the foreign exchange markets to achieve stability.

Bitcoin and the digital currency asset moved lower over the past week. Bitcoin was trading at the $9,408.23 level as of June 17.  Bitcoin failed after several attempts to conquer the $10,000 level. The leading digital currency fell 4.56% since last week. Ethereum posted a 6.28% loss since June 10. Ethereum was at $230.29 per token on Wednesday after recent gains. The market cap of the entire asset class moved 4.75% lower over the past week. Bitcoin marginally outperformed the whole asset class since the previous report. The number of tokens increased by 22 to 5585 tokens since June 10. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today.

On Wednesday, the market cap was around $266.360 billion. Open interest in the CME Bitcoin futures fell 8.89% since last week as frustrated longs likely exited risk positions as the $10,000 level proved a significant resistance level. The next level on the upside stands at the recent high of $10,565. The trend is your friend in Bitcoin, and it remains higher. Support is at $8,695.

The Canadian dollar moved 1.34% lower since June 10. Open interest in C$ futures rose by 4.31% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that produces significant quantities of energy and agricultural products. Keep an eye on the oil futures market for clues about the Canadian dollar as it often acts as a proxy for the price of the energy commodity. Weakness in energy and grain prices over the past week was not bullish for the value of the Canadian currency.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 1.84% lower since last week. The geographical proximity to China makes the Australian dollar sensitive to events in China. The A$ is a proxy for both China and raw material prices. I would be cautious with any positions on the long or short side of the A$ given the potential for volatility in the current conditions. Economic strength or weakness in China will determine the path of the Australian economy. Any retribution over the spread of coronavirus could cause retaliatory measures by both sides, which would weigh on Australia’s economy. In the long-term, the stimulus is bullish for commodities prices and both the Australian and Canadian currencies. The brewing tensions with China are a reason to be cautious with the Australian currency. Over the coming months and years, we could see significant gains in the C$ and A$ as commodity prices rise because of inflationary pressures caused by the increase in the global money supply. I believe the price action in 2020 in all markets is similar to 2008. In the years that followed, commodity prices soared because of the stimulus, taking the Australian and Canadian currencies appreciably higher against the US dollar because of their sensitivity to raw material prices. Over the long-term, buying the A$ and C$ during periods of weakness could prove to be the optimal strategy.

Over the past week, the Brazilian real moved 5.93% lower against the US dollar on the September futures contract after recent gains. The debt default by neighboring Argentina had little impact on the Brazilian real as it bounced against the US dollar. The real moved to a high of $0.2053 level against the US dollar on the September contract before turning lower last week. The September Brazilian currency was trading at the $0.189650 level after falling to a new and lower low at $0.16780 on May 13. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are sensitive to changes in the direction of the Brazilian real. The falling real had been a factor that weighed on sugar and coffee prices as Brazil is the world’s leading producer and exporter of the soft commodities and output costs are in local currency terms over the past weeks along with crude oil. However, as we have seen in other markets, low prices may not stop shortages of supplies as the virus impacts parts of the supply chain when it comes to processing or transporting the commodities. The weather conditions in critical growing regions and the spread of the virus could also cause price volatility in the agricultural products. Brazil has seen a significant increase in the number of infections and fatalities because of coronavirus, which could harm the value of its currency. However, in the long run, I am bullish for the real because of Brazil’s commodity production. The nation is a supermarket to the world for many products. In the aftermath of the global pandemic, the price tag for liquidity and stimulus could cause inflationary conditions that would provide support for the A$, C$, and even the Brazilian real.

Gold edged marginally higher over the past week. Silver, platinum, and palladium edged lower. Gold and silver have long histories as currencies.

 

Precious Metals

As of the settlement prices on June 17, gold and rhodium were a touch higher, and silver, platinum, and palladium prices moved to the downside. Precious metals were stable, and most were consolidating within their recent trading ranges.

Gold was 0.87% higher over the past week. Silver fell 0.12% since June 10. August gold futures were at $1735.60 per ounce level on Wednesday. July silver settled at $17.775 per ounce on June 17. I maintain a bullish opinion on the gold and silver markets as the odds favor that the price action that followed the 2008 global financial crisis is a blueprint for the coming months and years.  Stimulus is bullish fuel for gold and silver as increases in the money supply weigh on the value of fiat currencies. Price corrections continue to be buying opportunities in the silver and gold markets. However, we could see wide price variance given the price levels. I continue to hold a long core position in gold and silver. I am also running short-term long positions looking to buy on dips with the hope of taking profits on rallies. On the short-term risk positions, I am using both the metals and the diversified gold and silver mining ETF products. Nothing has changed since last week.

While I am bullish on the gold and silver markets, they rarely move in a straight line. Using corrections as buying opportunities is likely to be the optimal approach to trading and investing.

Technical resistance for August gold stands at $1789.00 per ounce, the high from mid-April. Support is at $1671.70, the recent low. In silver, support is at $17, with resistance at $18.95 on the July contract. If the price action from 2008 through 2011 is a guide, gold will head for the $2000 to $3000 per ounce level over the coming months, and silver will follow the yellow metal to the upside. Silver’s recent move is a bullish sign for the two metals. Silver tends to move on sentiment, which remains bullish. However, markets rarely move in a straight line, which could lead to corrective periods and price consolidation.

Gold mining shares moved lower with the stock market over the past week, with the GDX down 4.87% and GDXJ moving 6.61% lower. The mining shares tend to outperform the yellow metal on the upside and underperform on the downside. A falling stock market often takes the prices of mining shares with it to the downside. The SIL and SILJ silver mining ETF products that hold portfolios of producing companies moved 7.21% and 12.44% lower since June 10. The combination of weakness in stocks and silver weighed on the mining shares.

Gold marginally outperformed silver over the past week. The silver-gold ratio reached a new modern-day high as risk-off selling hit the silver market, taking the price below the $12 per ounce level. The ratio had been moving steadily lower over the past weeks. I will continue to add to long physical positions in gold, silver, and platinum, during periods of price weakness. I will continue to trade leveraged derivatives and mining stocks on a short-term basis with tight stops. While gold mining stocks and derivatives follow the price of gold, they are not the metal and could experience significant periods of price deviation if risk-off conditions return to the stock market. I hold long core positions but will employ tight stops on any new positions that increase exposure to the two leading precious metals.

July platinum fell 0.92% since the previous report.  Platinum had been a laggard in the precious metals sector in 2020. July futures fell to the $838.20 per ounce level on June 17. The level of technical resistance is at $943 on the July futures contract, the recent high. Support in platinum is at $792.40 per ounce on the nearby futures contract. Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium was at a midpoint price of $7,300 per ounce on June 10, up $100 or 1.39% over the past week. September Palladium fell by 0.27% since last week. Support is at $1832.20 on the September contract with resistance at $2060.30. September palladium settled at the $1925.50 per ounce level on Wednesday.

Open interest in the gold futures market moved 2.92% higher over the past week. The decline over the past weeks in open interest is because of problems with dealers when it comes to the EFP, or arbitrage positions between gold for delivery on COMEX and London. The metric moved 1.76% lower in platinum. The total number of open long and short positions decreased by 4.27% in the palladium futures market. Silver open interest fell by 0.49% over the period.

The silver-gold ratio moved higher over the past week.

Source: CQG

The daily chart of the price of August gold divided by July silver futures shows that the ratio was at 97.99 on Wednesday, up 2.68 from the level on June 10. The ratio traded to over the 124:5 level on the high on March 18. The long-term average for the price relationship is around the 55:1 level. The ratio rose to the highest level since futures began trading in 1974 as the price of silver tanked recently. The move lower since mid-March has been a supportive factor for the two metals. In 2008, the ratio peaked during the risk-off selling and then fell steadily until 2011.  Over the past week, the ratio drifted back towards the 100 level.

Central banks continue to purchase gold to add to reserves. They added 31. 6 tons of the yellow metal to reserves in April. So far, in 2020, the official sector bought a net of 142 tons of gold. In 2019, they added 650.3 tons. Turkey was the leading buyer, adding 38.8 tons. Net buying by central banks is a supportive factor for the price of gold.

Platinum was 0.92% lower, and palladium moved 0.27% lower over the past week. September Palladium was trading at a premium over July platinum with the differential at the $1087.30 per ounce level on Wednesday, which slightly widened since the last report. July platinum was trading at a $897.40 discount to August gold at the settlement prices on June 17, which also widened since the previous report.

The price of rhodium, which does not trade on the futures market, rose $100 on the week. Rhodium is a byproduct of platinum production. The low price of platinum caused a decline in output in South African mines, creating a shortage in the rhodium market that lifted the price to the $13,000 level before risk-off conditions caused the price to evaporate to $2,000. Rhodium has been highly volatile over the past weeks after reaching its peak. The price moved higher from a low at $575 per ounce in 2016. The bid-offer spread in Rhodium narrowed from $3000 to $2000 per ounce, down $1,000 from previous weeks. The spread remains at a level that makes any investment in the metal irrational. Rhodium is an untradeable commodity, but it can provide clues about the price path of the other PGMs.

I continue to favor buying physical platinum as well as gold and silver during corrective periods. In gold and silver, the GLD, IAU, BAR, and SLV ETF products hold physical bullion and are acceptable proxies for the coins and bars. In platinum, PPLT and PLTM are the proxies. Since a NYMEX platinum futures contract contains 50 ounces of metal, purchasing a nearby futures contract on NYMEX and standing for delivery is a way to avoid significant premiums for the metal. At $838.20 per ounce, a contract on NYMEX has a value of $41,910, after falling to the lowest level just under two decades in March.

The GLTR ETF product holds a portfolio of physical gold, silver, platinum, and palladium, for those looking for diversified precious metals exposure. I continue to believe that gold is heading a lot higher, but the route will not be in a straight line. The stimulus in the US and Europe continues to be highly supportive of gold and silver prices. Platinum is inexpensive from a historical perspective compared to gold and palladium. Palladium and rhodium continue to trade in bullish patterns, but both are sensitive to global economic conditions. We should continue to see volatility in all of the precious metals with a bias to the upside. I continue to favor gold, silver, and platinum on price weakness. I hold a long core position and a trading position where I buy dips and take profits on rallies. Since mining shares tend to be more volatile, I have used the mining ETFs and ETNs in gold and silver shares for short-term trading purposes.

 

Energy Commodities

Energy turned mostly lower with the stock market over the past week as the price of both crude oil benchmarks fell. Meanwhile, oil products posted marginal gains on the week. Crude oil ran out of upside steam above the $40 level on nearby NYMEX futures. Brent outperformed WTI crude oil over the past week. Fears over demand weighed on the price of the energy commodity. Meanwhile, the products outperformed the raw crude oil leading to higher levels for the gasoline and distillate crack spreads. Natural gas fell along with coal for delivery in Rotterdam, but ethanol edged higher since June 10.

July NYMEX crude oil futures fell 4.14% since June 10 as the market ran out of upside fuel. The July contract settled at $37.96 per barrel on June 17 after trading to a low of $17.27 on April 28 and a high at $40.44 on the July futures contract on June 8. Production cuts by OPEC and the decline in US output contributed to the recent recovery from the lowest prices in history for WTI crude oil futures in late April. However, crude oil inventories rose for the week ending on June 5, according to both the API and EIA, product stockpiles were mostly higher during the first week of June. Crude oil inventories moved higher again for the week ending on June 12.

Chinese demand for crude oil has been robust over the past weeks. With parts of the economy reopening in Europe and the US, the demand side of the equation has improved. However, news of new outbreaks and hotspots weighed on the price of the energy commodity. Last week I wrote, “the bullish trend continued over the past week but could stall around the $40 per barrel level.” Oil turned lower at $40.44, after partially filling the gap on the July NYMEX futures. The top end of the void is at $41.88 per barrel from March 6.

August Brent futures outperformed June NYMEX WTI futures, as they fell 2.63% higher since June 10. July gasoline was 0.45% higher, and the processing spread in July was 16.71% higher since last week. The July gasoline crack spread was at $13.06 per barrel. Wild swings in energy prices caused wide price ranges in the crack spreads the reflect refining margins. Gasoline crack spreads tend to exhibit strength during the summer driving season in the US, but 2020 is no ordinary year.

July heating oil futures moved 0.77% higher from the last report. The heating oil crack spread was 21.12% higher since June 10. Heating oil is a proxy for other distillates such as jet and diesel fuels. The July distillate crack spread recently traded to a low of $7.20, the lowest since 2010, and closed on Wednesday at $11.70 per barrel. The price action in the processing spreads has been highly volatile, given the timing differences between moves in crude oil and products over the past weeks. The crack spreads are a real-time indicator of demand for crude oil as well as barometers for the earnings of refining companies that process raw crude oil into oil products. The crack spreads could be a significant indicator of demand over the coming days and weeks as the wheels of the US economy have begun moving. However, the energy market stalled because of demand concerns.

Technical resistance in the July NYMEX crude oil futures contract is at $41.88 per barrel level with support at the $30.00 level on the July contract. The measure of daily historical volatility was at 50.40% on June 17, higher than the 37% level on June 10. The price variance metric was at over 180% in early May. Demand remains the overwhelming critical factor when it comes to the price direction of the energy commodity. As I wrote over the past weeks, “falling production should eventually balance the market and could create a deficit at some point in the future. The course of the pandemic is crucial for the oil market over the coming weeks and months. If we have seen the peak, we could see prices rise. However, further outbreaks that prompt a return to closing parts of the economy again would be a highly bearish factor for energy demand.” Fears over new hotspots in the US and other countries around the globe drove the price of oil and products lower over the past week.

The Middle East remains a potential flashpoint for the crude oil market. Relations between the US and Iran and Saudi Arabia and Iran have not improved over the past months. While the leadership in Teheran has had their hands full with coronavirus, we could see them lash out at US interests in the region over the coming weeks or months. Any hostilities that cause supply concerns could send the price of crude oil for nearby delivery appreciably higher in the blink of an eye. At around $40 per barrel for the Brent benchmark, any actions that impact production, refining, or logistical routes could cause a far greater percentage move in the price of oil than we witnessed at the beginning of 2020. The Middle East could provide surprises to the oil market, but global demand remains the primary factor for the price over the coming weeks.

Crude oil open interest decreased by 2.33% over the period. NYMEX crude oil fell by 4.14%, and the energy shares underperformed the energy commodity since June 10. The XLE dropped 7.44% for the week as of June 17.

I continue to be cautious when it comes to any investments in debt-laden oil companies. I would only consider those with the most robust balance sheets like XOM and CVX in the US. Exxon and Chevron could stand to pick up lots of production assets at bargain-basement prices over the coming months as the number of bankruptcies rises in the oil and gas sectors. I would only purchase these companies during corrective periods. Nothing has changed since last week when it comes to opportunities for oil-related equities.

The spread between Brent and WTI crude oil futures in August was steady at the $2.49 per barrel level for Brent, which was up 47 cents from the level on June 10. The August spread moved to a high of $4.41 on April 30. The continuous contract peak was at $11.52 on April 20 as all hell broke loose in the crude oil futures market. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. However, this time, it was the carnage in the price of WTI futures that drove the spread to higher levels. Brent crude can travel by ocean vessel to consumers around the globe, while WTI is a landlocked crude oil. The lack of storage capacity was responsible for the price action in the spread and outright prices in late April. The decline in the Brent-WTI could reflect the decline in US output and the anticipation of rising demand for gasoline.

A decline in US production over the coming months could cause significant volatility in the Brent-WTI spread. Before 2010, WTI often traded at a $2 to $4 premium to Brent. The WTI grade has a lower sulfur content making it the preferable crude oil for processing into gasoline, the world’s most ubiquitous fuel. If US output continues to decline significantly and demand returns to the market, we could see it impact the Brent-WTI differential and cause periods where WTI returns to a premium to the Brent, which is better suited for refining into distillate products. The USO and BNO ETF products replicate the short-term price action in WTI and Brent futures, respectively. While both do an adequate job tracking the futures in the short-term, neither are particularly effective for medium or long-term positions because of the volatility of the forward curves in both crude oil benchmarks. The path of least resistance of the oil market will be a function of the ups and downs of the global pandemic over the coming weeks and months.

Term structure in the oil market experienced a significant shift as the price of crude oil tanked in March and April. The flip from backwardation to contango in the spread reflects the flood of supplies in the crude oil market. Oil traders have filled tanks and storage all over the world to take advantage of the wide contango with financing rates at historic lows. Cash and carry trades in the oil market became one of the only profitable areas of the market as demand evaporated. The cash and carry trade put upward pressure on freight and storage rates. The forward curve in crude oil highlights the current state of the widest contango in years. The US is filling its strategic petroleum reserve to the brim at the current low price levels. The contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel. As prices moved higher over the recent weeks, contango declined.

Over the past week, July 2021, minus July 2020, moved from a contango of $1.93 to $2.66, an increase of $0.73 per barrel. In early January, the spread traded to a backwardation of $5.65, $8.31 per barrel tighter than the level on June 17. The spread hit a high of $13.46 per barrel on April 27, the day that July futures reached a low of $17.27 per barrel. Rising contango was a sign of a glut in the oil market while falling contango signifies tighter supplies. The capacity for crude oil storage around the globe fell dramatically as well-capitalized traders purchased nearby crude oil, put it in storage, and sold it for futures delivery. The decline in the spread could have triggered some profit-taking, which opened up more capacity on the storage front.  Falling production also caused the spread to tighten. We could see an unwind of the spreads continue as they gravitate back towards flat as production declines and inventories begin to fall over the coming months, which would result in significant profits for well-capitalized crude oil traders. The decline in contango since late April was a supportive sign for the price of oil. The number of rigs operating in the US continued to decline significantly over the past week, and production has been moving lower in response to the lowest price levels in years and demand problems over the past months.

US daily production fell to 10.50 million barrels per day of output as of June 12, according to the Energy Information Administration. The level of production fell 600,000 barrels from the previous week. As of June 5, the API reported an increase of 8.42 million barrels of crude oil stockpiles, and the EIA said they rose by 5.70 million barrels for the same week. The API reported a decrease of 2.913 million barrels of gasoline stocks and said distillate inventories rose by 4.271 million barrels as of June 5. The EIA reported a rise in gasoline stocks of 900,000 barrels and an increase in distillates of 1.60 million barrels. Rig counts, as published by Baker Hughes, fell by 7 for the week ending on June 12, which is 589 below the level operating last year at this time. The decline in the rig count has been significant and should lead to falling output in the US. The number of rigs operating stood at 199 as of June 12. The inventory data from both the API and EIA was mostly bearish. However, the drop in output in the US is a supportive factor. As of June 12, US production dropped by 2.6 million barrels per day since March.

OIH and VLO shares moved lower since June 10 with other energy stocks. OIH fell by 11.52%, while VLO moved 9.75% to the downside over the past week. As I wrote last week, “the level of crack spreads is a reason for short-term caution for VLO.” OIH was trading at $130.83 per share level on Wednesday. I am holding a small position in OIH. We are long two units of VLO at an average of $70.04 per share. VLO was trading at $62.32 per share on Wednesday.

The July natural gas contract settled at $1.638 on June 17, which was 7.98% lower than on June 10. The July futures contract traded to a high of $2.364 on May 5, where it failed miserably. Support in July stands at $1.597, this week’s low on the July contract, and at $1.519 per MMBtu the low from late March and early April on the continuous contract. Short-term resistance is at the $1.864 level, the high from June 5.

Last Thursday, the EIA reported an increase in natural gas stockpiles.

Source: EIA

The EIA reported an injection of 93 bcf, bringing the total inventories to 2.807 tcf as of June 5. Stocks were 36.3% above last year’s level and 17.6% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019, this year the low was at 1.986, 879 bcf higher. This week the consensus expectations are that the EIA will report an 85 bcf injection into storage for the week ending on June 12. The EIA will release its next report on Thursday, June 18, 2020.  Over the past eleven weeks, the percentage above last year’s level has been declining when it comes to natural gas stockpiles. The steady decline from 79.5% above the one-year level as of March 20 to 36.3% last week could provide some fundamental support to the natural gas market. The trend could reflect higher demand or lower production. Given the events since March, it is likely that output is causing a slower rate of injections into storage. Baker Hughes reported that a total of 78 natural gas rigs were operating in the US as of June 12 compared to 181 last year at this time. Meanwhile, the price action over the past few weeks continued to be a sign of fragile demand. I suggest tight stops on any risk positions but continue to prefer the long side over the coming week.

Open interest rose by 1.92% in natural gas over the past week. Short-term technical resistance is at $1.864 per MMBtu level on the July futures contract with support now at $1.597 per MMBtu, lower than last week. Price momentum and relative strength on the daily chart were in oversold conditions as of Wednesday.

July ethanol prices moved 0.57% higher over the past week. Open interest in the thinly traded ethanol futures market moved 14.96% lower over the past week. With only 108 contracts of long and short positions, the biofuel market is untradeable and looks like it could be delisted. The KOL ETF product fell 4.45% compared to its price on June 10. The price of July coal futures in Rotterdam fell 1.32% over the past week.

On Tuesday, June 16, the API reported a 3.857 million barrel increase in crude oil inventories for the week ending on June 12. Gasoline stocks rose by 4.267 million barrels, while distillate stockpiles increased 919,000 barrels over the period. On Wednesday, the EIA said that crude oil stocks moved 1.20 million barrels higher, while gasoline inventories fell by 1.70 million barrels. Distillate stockpiles decreased by 1.40 million barrels, according to the EIA. The API and EIA reports were marginally bearish for the price of the energy commodities. Demand remains the significant factor for the price direction of crude oil.

Meanwhile, the output is declining fast with the number of operating rigs plunging and the daily production data from the EIA trending lower. I expect volatility in the crude oil market as it will move higher or lower on optimism or pessimism on the back of the progress of the virus and progress on treatments and a vaccine. The latest reports of new outbreaks were bearish for the energy sector. Production is falling, but demand remains the most significant factor when it comes to the price direction. The price recovery since late April ran into selling at the $40 per barrel level over the past week.

In natural gas, the forward curve continues to be wide, with January 2021 futures trading at a significant premium over natural gas for July 2020 delivery.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the settlement prices on June 17, at $1.638 in July was 14.2 cents per MMBtu lower than on June 10.

The price is in contango where deferred prices are higher than levels for nearby delivery, reflecting the condition of oversupply and high level of inventories compared to past years as we are in the 2020 injection season. Natural gas stockpiles started the 2020 injection season at a level where a build to over four trillion billion cubic feet and a new record high is possible in November, which could keep the price from running away on the upside in the lead-up to the winter of 2020/2021. However, production is likely grinding lower because of the low level of prices that make output uneconomic. The trend in stocks since March 20 compared to last year is a sign of declining output. The debt-laden oil and gas businesses in the US could receive support from the government to keep energy output flowing, but demand destruction is a critical factor. Meanwhile, the differential between nearby July futures and natural gas for delivery in January was $1.312 per MMBtu or 80.1% higher than the nearby price, reflecting both seasonality and substantial inventory levels.

I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ attract lots of volume and are excellent short-term proxies for natural gas futures. I will not take positions in leveraged products overnight and will only day trade, given the volatility in the markets.

We are holding a long position in PBR, Petroleo Brasileiro SA. PBR shares tanked with oil and the Brazilian real but has made a comeback. At $8.51 per share, PBR was 4.27% lower than on June 10. I have a small position that I will hold as a long-term investment. PBR had been weak on the back of the falling value of the Brazilian currency.

Demand will drive the price of crude oil and all energy commodities over the coming weeks and months. Falling production is supportive, but global requirements will be the primary factor when it comes to the path of least resistance of the prices of oil and oil products. Natural gas remains at a low level, limiting the downside with the price below the $1.65 per MMBtu level. Expect lots of price volatility in the energy sector, which is following the stock market or vice versa.

 

Grains 

Wheat moved to a new low since last week, and the price was fell below the $4.90 per bushel level on the July futures contract. Corn and soybeans posted small gains. The US Department of Agriculture released its June World Agricultural Supply and Demand Estimates on June 11, and prices hardly moved. The full text of the WASDE is available via this link.

July soybean futures edged 0.66% higher over the past week and was at $8.7125 per bushel on June 17. The rising tensions with the Chinese could weigh on soybean prices, but the weather is the leading factor for the price of the oilseed over the coming weeks. Open interest in the soybean futures market moved 1.76% higher since last week. Price momentum and relative strength indicators were rising towards overbought territory on Wednesday. Soybean futures were moving away from the bottom end of the recent trading range. The move above the $8.62 level was a technical break to the upside, but the oilseed futures are not running away on the upside.  The USDA told the soybean market:

This month’s U.S. soybean supply and use projections for 2020/21 include higher beginning stocks, higher crush, and slightly lower ending stocks. Beginning stocks are raised 5 million bushels with higher crush for 2019/20 more-than-offset with lower production and a lower export forecast. Lower 2019 production reflects the latest re-survey by NASS for North Dakota. The 2019/20 soybean crush is raised 15 million bushels reflecting increased domestic soybean meal use. Soybean exports are reduced 25 million bushels on increased competition from South America. Increased beginning stocks for 2020/21 are more than offset with a higher soybean crush forecast, which is raised along with increased domestic soybean meal use. With higher soybean crush more than offsetting higher beginning stocks, 2020/21 ending stocks are projected at 395 million bushels. The 2020/21 season-average soybean and product price forecasts are unchanged this month. The 2020/21 global oilseed supply and demand forecasts include slightly higher production and lower ending stocks compared to last month. Higher peanut, soybean, and sunflowerseed production is partly offset by lower cottonseed output. A notable revision to production is for EU canola, lowered 0.2 million tons to 16.8 million, based largely on lower yields for Germany. The EU revision is offset by higher Australian canola production. The 2020/21 soybean ending stocks are lowered 2.1 million tons to 96.3 million, mainly reflecting lower carryin due to revisions to 2019/20 balance sheets. For 2019/20, soybean exports are increased 1 million tons each for Argentina and Brazil based on the recent pace of shipments and reflect increased crush demand and imports for China. Partly offsetting is reduced 2019/20 U.S. exports. These revisions result in higher stocks for China and lower stocks for South America.

Source: USDA June WASDE report

Lower US and global ending stocks are not bearish for the soybean futures market.

 

The July synthetic soybean crush spread fell 6.75 cents from the level on June 10 to 71 cents, which is a warning sign for the oilseed futures.

I had been writing, “I believe that a relief rally is possible in the soybean futures and would only position from the long side of the market at under $8.50 per bushel.” US relations with China could throw cold water on the chances of higher price levels as we are now in June. I suggest tight stops on long risk positions and would be looking to take profits on rallies. I will tighten risk parameters the further we move into the growing season, which risks tailing off to minimal levels during the peak summer months when crops become established in August. The best chances for a supply-based rally will come early in the growing season when the plants are most vulnerable. My guidance is unchanged from last week. The soybean futures market has been so quiet that something is bound to wake it from its slumber. The recent move above the $8.70 level has been a constructive sign. However, the price action in the crush spread is not bullish. While the prospects for trade between the US and China are bearish, a period of dry weather conditions could cause a short-covering rally. The weather is the most significant factor over the coming weeks.

July corn was trading at $3.3025 per bushel on June 17, which was 1.23% higher on the week. Open interest in the corn futures market rose by 3.21% since June 9. Technical metrics were above neutral readings in the corn futures market on the daily chart as of Wednesday. Support on nearby corn futures is at the $3.09 level, on the continuous contract, $3 per bushel is a line in the sand on the downside. Long positions should have stops below $3 per bushel. Technical resistance remained at $3.3475, after the move above the $3.30 level. The USDA told the corn futures market:

This month’s 2020/21 U.S. corn outlook is little changed from last month, with fractional increases to beginning and ending stocks. Beginning stocks are raised, as a 45-million-bushel reduction in estimated production for 2019/20 is largely offset by a 50-million-bushel reduction in projected corn used for ethanol. Corn used for ethanol is lowered reflecting a slower-than-expected rebound in ethanol production as indicated by Energy Information Administration data during the month of May and into early June. For 2020/21, with supply up slightly and no changes to projected use, ending stocks are 5 million bushels higher at 3.3 billion bushels. The season-average farm price is unchanged at $3.20 per bushel. The global coarse grain production forecast for 2020/21 is raised 3.2 million tons to 1,484.6 million. This month’s foreign coarse grain outlook is for larger production, increased use, and lower stocks relative to last month. Brazil corn production is raised based on higher expected area. Barley production is raised for the EU, based mostly on a forecast increase for the United Kingdom that is partly offset by a reduction for France. Barley production is raised for Australia, but lowered for Ukraine, India, and Russia. For 2019/20, Brazil corn WASDE-601-2 production is unchanged, as higher indicated area is offset by a reduction in yield. Yield prospects for much of the Center-West are generally favorable in contrast to the South where conditions have been poor. Major global trade changes for 2020/21 include a larger corn export forecast for Zambia, with increases in corn imports for Thailand and Honduras. Barley exports are lowered for Australia, based on a reduction in projected imports for China. For 2019/20, corn exports are raised for Argentina but lowered for Brazil for the local marketing year beginning March 2020 based on observed data through early June. Foreign corn ending stocks for 2020/21 are lowered from last month, mostly reflecting reductions for China, Argentina, South Africa, and Paraguay that more than offset increases for Brazil and India. Source: USDA June WASDE report

While US stocks will move slightly higher according to the USDA, worldwide inventories will decline a bit despite increasing in global production. The corn report was not bearish, but the price remained near the $3.30 per bushel level.

Corn will continue to be highly sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop.  The price of July ethanol futures rose by 0.57% since the previous report. July ethanol futures were at $1.247 per gallon on June 17. The spread between July gasoline and July ethanol futures was at 3.17 cents per gallon on June 17 with gasoline at a discount to ethanol. The spread moved 0.16 cents since last week as gasoline marginally underperformed the biofuel in July futures.  The prospects for corn prices are a function of both the weather and the price of gasoline and crude oil. Corn found support from the energy sector over the past weeks, which lifted the price to its highest level since April 14. Over the past week, energy and ethanol fell, but the WASDE was enough to keep the price of corn stable to slightly higher.

July CBOT wheat futures fell 3.46% since last week. The July futures were trading $4.8875 level on June 17. Open interest increased by 8.64% over the past week in CBOT wheat futures. The support and resistance levels in July CBOT wheat futures stand at $4.4350 and $5.2900 per bushel, the support level dropped from last week. Price momentum and relative strength were at an oversold condition on Wednesday on the daily chart. The USDA told the wheat futures market:

U.S. 2020/21 wheat supplies are up on a larger crop and a slight increase in beginning stocks. The change in beginning stocks reflects a 5-million-bushel reduction in 2019/20 exports. Winter wheat production is forecast up 11 million bushels to 1,266 million with increases in Hard Red Winter and White Winter more than offsetting small decrease for Soft Red Winter. Total 2020/21 wheat production is now forecast at 1,877 million bushels, and total supplies are raised 16 million to 3,000 million. Domestic use and exports for the new marketing year are unchanged this month, and ending stocks are raised 16 million bushels to 925 million, which is a 6-year low. World 2020/21 wheat supplies are raised 5.7 million tons on a 4.9-million-ton production increase and higher beginning stocks. India production is raised 4.2 million tons, and Australia is up 2.0 million, both on updated government statistics. India’s crop is projected to be record-large, and Australia’s crop is expected to rebound on improved conditions following two consecutive years of drought. Turkey and China are both increased by 1.0 million tons. Partly offsetting these changes are crop reductions of 2.0 million tons for the EU and 1.5 million for Ukraine, both reflecting dry conditions during key parts of the growing season. Projected 2020/21 global exports are raised 0.9 million tons to 188.9 million, led by a 2.0- million-ton increase for Australia on larger supplies, and a 1.0-million increase for Russia on reduced export competition from Ukraine. Exports are lowered 1.5 million tons for Ukraine and 0.5 million for the EU, both on smaller crops. With increased supplies, and global use lowered fractionally, world ending stocks are raised 6.0 million tons to a record-high 316.1 million, with China and India accounting for 51 percent and 10 percent of the total, respectively.

Source: USDA June WASDE report

Global inventories are at a record high level, but so is the population of the world. The USDA is saying that there are going to be plenty of wheat supplies to meet the requirements of people on the planet in 2020.

As of Wednesday, the KCBT-CBOT spread in July was trading at a 56.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread widened by 7.50 cents since June 10. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts. The spread moved away from the long-term average over the past week, which could weigh on the price of wheat and set the stage for another test below the $5 per bushel level.

I will continue to hold long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks. The further we move into the growing season without any significant price appreciation, I will work to cut position sizes. The time of the year when crops are most vulnerable to the weather is between now and July. As crops mature, they can withstand periods of adverse conditions. I continue to favor the long side but will be looking at the calendar as a time stop on positions is likely to be the optimal approach to controlling risk. Grains have been disappointing, but we are only at the beginning of the growing season, and uncertainty over the 2020 crop will remain at an elevated level over the coming weeks.

The June WASDE report turned out to be modestly supportive of corn and beans, but bearish for the wheat futures market.

 

Copper, Metals, and Minerals

The fall in the stock and crude oil markets over the past week was not bullish for most of the industrial commodities. However, prices were mostly stable to higher. Copper on COMEX fell, but the one-day lag caused it to post a gain on the LME. Aluminum, nickel, zinc, lead and tin posted gains. Iron was up a touch, but uranium fell. The Baltic Dry Index posted a significant gain, and it powered over the 1000 level. Lumber moved to the upside.

Copper fell 2.52% on COMEX over the past week. The red metal was 1.46% lower on the LME since the last report. Open interest in the COMEX futures market moved 0.31% lower since June 9. July copper was trading at $2.5895 per pound level on Wednesday. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. Over the past week, LME inventories and COMEX stockpiles moved higher.

Long-term technical support for the copper market is at the early 2016 low of $1.9355 per pound. From a short-term perspective, the first level on the downside now stands at $2.3585 per pound on July futures, and then the $2.2895 and $2.0595 levels. Chinese demand will continue to be the most significant factor when it comes to the path of the price of copper and other base metals and industrial commodities over the coming weeks and months. Then rising tensions over coronavirus, Hong Kong, and trade could cause volatility in the sector. Keep in mind that during the 2008 financial crisis, copper fell to a bottom of $1.2475 per pound. The decline came from over $4 per pound in early 2008. By 2011, the copper price rose to a new all-time high at just under $4.65 per pound. A massive level of stimulus is supportive of the price of copper and other commodities. Technical resistance is now at $2.7000 per pound, the June 10 high. The markets are not yet out of the woods when it comes to coronavirus. Any outbreaks that cause the economy to shut down again or take a significant step back in social distancing easing could cause selling to return to all markets, and industrial commodities could fall sharply. Therefore, caution is advisable in copper, which can become extremely volatile during risk-off periods. We could see volatility increase as tensions between the US and China rise. The $2.70 level turned out to be formidable resistance.

The LME lead price moved higher by 1.92% since June 9. The rise in demand for electric automobiles around the world had been supportive of lead in the long term as the metal is a requirement for batteries, but Coronavirus had weighed on the price of lead because of falling fuel prices. Since late April, the prices of crude oil, gasoline, and lead moved higher. Lead was strong over the past week, despite the weakness in energy prices. The price of nickel moved 0.74% higher over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year. Tin rose 1.26% since the previous report despite a rise in inventories. Aluminum was 0.19% higher since the last report. The price of zinc posted a 0.32% gain since June 9. Zinc was at the $2018.50 per ton level on June 16. Nonferrous metals remained within their respective trading ranges.

July lumber futures were at the $382.30 level, 5.61% lower since the previous report. Interest rates in the US will eventually influence the price of lumber. Lumber can be a leading economic indicator, at times. The price of uranium for July delivery fell 0.60% after recent gains and was at $33.00 per pound. The world’s leading producer, Kazakhstan, suspended production nationwide for three months to slow the spread of COVID-19, which helped to lift the price over the past months. The volatile Baltic Dry Index rose 47.62% since June 10 to the 1054 level after a 30% rise last week. June iron ore futures were 0.52% higher compared to the price on June 10. Supply shortages of iron ore from Brazil have supported the price over the past year. Open interest in the thinly traded lumber futures market fell by 6.17% since the previous report.

LME copper inventories moved 5.03% higher to 248,475 as of June 16. COMEX copper stocks rose by 8.93% from June 9 to 74,656 tons. Lead stockpiles on the LME were 0.10% lower as of June 16, while aluminum stocks were 4.89% higher. Aluminum stocks rose to the 1,616,550-ton level on June 16. Zinc stocks increased by 22.84% since June 16, which is a warning sign for the price of the metal as it sits at just below $2020 per ton. Tin inventories rose 31.66% since June to 3,285 tons after an almost 24% drop two weeks ago. Nickel inventories were 0.43% higher compared to the level on June 9.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 54 cents on June 17, down 8.0 cents since the previous report. The details for the call option are here:

https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000

 

US Steel shares were at $9.38 per share and moved 6.57% lower since last week.

FXC was trading at $10.70 on Wednesday, 77 cents lower since the previous report. I continue to maintain a small long position in FCX shares. FCX moves higher and lower with the price of copper.

I remain cautious on the sector and have limited any activity to very short-term risk positions. Brewing tensions between the US and China could cause a return of risk-off conditions to the industrial metals and commodities as can any new outbreaks of Coronavirus over the coming weeks and months. Keep stops tight on all positions in this sector that is highly sensitive to macroeconomic trends. Very little changed in this sector since last week.

We are long PICK, the metals and mining ETF product. We bought PICK at the $23.38 per share level, and it was trading at $24.83 on June 17, down 5.05% for the week. I continue to rate this metals and mining ETF that holds shares in the leading producing companies in the world a long-term hold. I would add to the long position on price weakness over the coming weeks and months if another risk-off period occurs. Base metals and industrial commodities prices could follow crude oil and stocks over the coming week.

 

Animal Proteins

Live and feeder cattle futures posted marginal gains since June 10 while lean hog futures fell.  The USDA released the June WASDE report on June 11 and told the animal protein sector:

The forecast for 2020 red meat and poultry production is raised from last month as higher forecast beef, pork, and broiler production more than offsets lower turkey production. The increase in beef and pork production largely reflects a faster-than-anticipated recovery in the pace of slaughter. The 2021 red meat and poultry production forecast is raised from the previous month. The beef production forecast is raised on higher expected cattle placements in the second half of 2020 which will be marketed in 2021. Pork production is unchanged from last month. The Quarterly Hogs and Pigs report will be released on June 25 and provide an indication of producers’ farrowing intentions for the second half of 2020; these are hogs which will likely be marketed in first-half 2021. The beef import forecast is raised for 2020 on recent trade data and increased domestic demand for processing grade beef, while the beef export forecast is raised on higher expected beef exports later in the year. No change is made to the 2021 beef trade forecast. The pork export forecast for 2020 is raised from the previous month, largely on the current pace of exports. No change is made to the 2021 pork trade forecast. For 2021, cattle prices are also raised on expected continued strength of packer demand in the first part of the year. The 2020 hog price forecast is reduced on current price weakness and increased supply pressure. The 2021 hog, broiler, turkey and egg price forecasts are unchanged from last month.

Source: USDA June WASDE report

Live and feeder cattle and lean hog prices weakened since the May report. The USDA lowered its price forecasts for hogs in 2020 but increased the projections for beef this year. In 2021 beef was raised while pork was unchanged since last month.

August live cattle futures were at 96.850 cents per pound level up 0.36% from June 10. Technical resistance is at $1.0190 per pound. Technical support stands at 93.575 cents per pound level. Price momentum and relative strength indicators were on either side of neutral readings on Wednesday but were leaning higher. Open interest in the live cattle futures market moved 1.73% higher since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket continued to be a dislocation in the market.

August feeder cattle futures slightly outperformed live cattle as they rose by 0.68% since last week. August feeder cattle futures were trading at the $1.33575 per pound level with support at $1.28325 and resistance at $1.38450 per pound level. Open interest in feeder cattle futures rose by 2.95% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs. Price momentum and relative strength metrics were just above neutral territory on Wednesday.

Lean hog futures fell since the previous report. The August lean hogs were at 53.175 cents on June 17, which was 4.75% lower than last week’s level. Price momentum and the relative strength index were below neutral readings on June 17 on the August contract and heading for oversold territory. Support is at 51.525 cents with technical resistance on the August futures contract at the 58.95 cents per pound level. The same issues impacting beef are present in the hog market with low prices at origination points and bottlenecks at processing plants causing consumer prices to rise and shortages to limit availability for customers.

The forward curve in live cattle is in contango from June 2020 until April 2021. There is a backwardation between April 2021 and August 2021, when contango returns until October 2021. The Feeder cattle forward curve is in contango from August through November 2020 before it flattens until May 2021. The forward curves did not move over the past week.

In the lean hog futures arena, after contango from July through August 2020, there is backwardation from August 2020 until October 2020. Contango exists from October 2020 through July 2021. There is a backwardation from July through December 2021. Futures prices reflect the potential for shortages for consumers. Some supermarkets continue to limit beef, pork, and chicken purchases to prevent hoarding.

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the August futures contracts moved higher as the price of live cattle outperformed lean hogs on a percentage basis.

 Source: CQG

Based on settlement prices, the spread was at 1.82130:1 compared to 1.72860:1 in the previous report. The spread rose by 9.27 cents as live cattle rose, and lean hog futures fell over the past week. The spread fell to a low of 1.2241 in mid-March, which was below the long-term average making pork more expensive than beef. The spread moved over the average and kept going, and beef is more expensive compared to pork on a historical basis on the August futures contracts.

The current low prices could give way to far higher levels in 2021 as producers adjust to the new price environment. After processing plants resume regular schedules in the eventual aftermath of the virus, shortages could develop. I believe that today’s low price levels will cause prices to rise next year, and consumers will face even higher levels at the supermarket. I am a buyer of cattle and hogs on price weakness and would only trade the beef and pork futures market from the long side over the coming weeks.

 

Soft Commodities

All five of the soft commodities posted declines over the past week with cocoa leading the way on the downside. FCOJ was the second most significant loser, followed by sugar, cotton, and coffee. Coffee and cotton posted marginal losses since June 10. The July futures are all rolling to the next active month as of June 17.

July sugar futures rolled to October and fell by 1.13% since June 10, with the price settling at 12.26 on June 17. The price of the sweet commodity fell to a new multiyear low at 9.05 cents per pound on the May contract on April 28. Technical resistance on October futures is now at 12.40 cents with support at 11.71 cents on July futures. Sugar made a new high at 15.90 cents on February 12 on the continuous contract, but the price collapsed on the back of risk-off conditions. The decline in the price of crude oil and ethanol in April weighed on sugar as the primary ingredient in ethanol in Brazil is sugarcane. The recovery in the oil market provided support for the price of sugar. Weakness in the Brazilian currency reduces production costs and had been a bearish factor for the sugar market.

The value of the September Brazilian real against the US dollar was at the $0.189650 against the US dollar on Wednesday, 5.93% lower over the period. The September real traded to a new low of $0.16780 on May 13. The Brazilian currency had been making lower lows as Coronavirus weighed heavily on all emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Argentina’s recent default on debt obligations did not put downward pressure on the Brazilian real. Meanwhile, Brazil has become a hotspot of the global pandemic, which could lead to supply chain problems for sugar, coffee, and oranges, as well as the other commodities produced by South America’s most populous nation and leading economy. Over the past week, we have seen price weakness in all three of those soft commodities.

Price momentum and relative strength on the daily sugar chart were near overbought territory as of June 17 as the recovery in energy prices provided support for sugar. The metrics on the monthly chart were below a neutral reading, as was the quarterly chart. Sugar made a new high above its 2019 peak in February before correcting to the downside. The low at 9.05 was the lowest price for sugar since way back in 2007. In 2007, the price of sugar fell to a low of 8.36 cents before the price exploded to over 36 cents per pound in 2011. At that time, a secular rally in commodity prices helped push the sweet commodity to the highest price since 1980. If the central bank and government stimulus result in inflationary pressures, we could see a repeat performance in the price action in the commodities asset class that followed the 2008 financial crisis. Sugar could become a lot sweeter when it comes to the price of the soft commodity in a secular bull market caused by a decrease in the purchasing power of currencies around the world. The price action in sugar over the past weeks reflects the recovery in crude oil and gasoline prices as ethanol moved higher. A stronger real has also provided support for the sweet commodity. Meanwhile, the lockdowns have weighed on demand, which could eventually cause production to decline.

In February, risk-off conditions stopped the rally dead in its tracks. Sugar found at least a temporary bottom at a lower low of 9.05 cents per pound. Open interest in sugar futures was 2.33% lower since last week. Sugar had rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures in late 2019 and early 2020. The correction in sympathy with the risk-off conditions in markets across all asset classes chased any speculative longs from the market. The long-term support level for the sweet commodity is now at 9.05 and 8.36 cents per pound. Without any specific fundamental input, sugar is likely to follow moves in the energy sector as well as the currency market when it comes to the exchange rate between the US dollar and the Brazilian real. Over the longer term, the cure for low prices in a commodity market is low prices as production declines, inventories fall, demand rises, and prices recover. We may have seen the start of a significant recovery in the sugar market after the most recent low. Over the past week, the price held recent gains.

July coffee futures rolled to September and continued to decline and moved 0.41% to the downside since June 10. September futures were trading at the 98.15 cents per pound level. The technical level on the downside is at 94.55 cents on the September futures contract. Below there, support is at around 92.20 and 86.35 cents on the continuous futures contract, the bottom from 2019. Short-term resistance is now at $1.0240 on the active month contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market, as we have witnessed over the past weeks and months. The lower coffee falls, the higher the odds of a significant rebound become. Our stop on the long position in JO is at $27.99. JO was trading at $30.35 on Wednesday. Open interest in the coffee futures market was 1.37% lower since last week. I continue to hold a small core long position in coffee after taking profits during the rally in March. I have added to my long position over the past week. From a technical perspective, a bottom above 92.20 cents would be constructive. Coffee could make a similar move to sugar give the recent strength in the Brazilian currency.

Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears subsided, causing the price of the soft commodity to decline to a level where buying returned to the market. Coffee had made higher lows since reaching 86.35 cents in mid-April. The price of coffee has remained firm despite the risk-off conditions. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were in oversold territory on Wednesday and turning higher. On the monthly chart, the price action was below neutral and falling towards an oversold condition. The quarterly picture was also below a neutral condition. Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Bottlenecks on South American ports could prove highly supportive of coffee prices as they could create a shortage of the beans. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the long side. Any new positions should have tight stops and defined profit objectives. Coffee is back near the bottom end of its pricing cycle. I would leave wide scales on buying as picking a bottom in the volatile coffee market is more than a challenge.

The price of cocoa futures fell over the past week as July rolled to September. On Wednesday, September cocoa futures were at the $2230 per ton level, 6.50% lower than on June 10. Open interest fell by 7.10% over the past week. Relative strength and price momentum were below neutral readings on June 17 heading towards oversold territory. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. Risk-off conditions pushed the price of cocoa beans lower, but they bounced after reaching a low that was $7 above the technical support level on the weekly chart. Cocoa has been falling since early June. We are long the NIB ETN product. NIB closed at $26.56 on Wednesday, June 10. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their cocoa exports, it should provide support to the cocoa market. The levels to watch on the upside is now at $2475, $2509, and at the mid-March high of $2631 per ton on the July contract on the daily chart. On the downside, technical support now stands at $2208 and $2183 per ton. The potential for Coronavirus to disrupt production in West Africa is high, which could lead to shortages of beans over the coming months. The health systems in producing countries like the Ivory Coast, Ghana, Nigeria, and others are not sufficient to treat patients or prevent the spread of the virus. Africa could suffer tragic consequences over the coming weeks and months. The flow of cocoa beans to the world could suffer as bottlenecks at ports could reduce exports. I continue to favor the long side in cocoa but will be cautious in the deflationary environment in markets. Nothing has changed since last week. I continue to view the price action in the cocoa futures market as a buying opportunity.

July cotton futures rolled to December declined by 0.56% over the past week. The recent declines had been on the back of continued concerns about the Chinese and global economies. The increase in tensions between the US and China is not supportive of the price of cotton. However, the weather conditions across growing regions will determine the price direction over the coming weeks and months.  December cotton was trading at 60.00 cents on June 17, after falling to the lowest price since 2009 in early April. On the downside, support is at 57.75, 52.15 cents, and then at 48.35 cents per pound. Resistance stands at the 61.14 cents per pound level. Open interest in the cotton futures market fell by 5.63% since June 9. Daily price momentum and relative strength metrics were just above neutral territory on Wednesday. The USDA’s WASDE report told the cotton market:

 

The most significant revision to this month’s U.S. cotton supply and demand estimates is a 200,000-bale decrease in 2019/20 mill use, to 2.5 million bales. U.S. mill use in 2020/21 was also revised downward by 100,000 bales, and ending stocks are now projected at 7.3 million bales in 2019/20 and 8.0 million bales in 2020/21. While the 43 percent stocks-use ratio projected for 2020/21 is marginally higher than the year before, and is substantially above recent levels, it would still be below the 55 percent ratio realized in 2007/08. The 2020/21 world cotton projections include slightly smaller production, reduced consumption, and higher beginning and ending stocks. World ending stocks are 5.2 million bales higher this month, reflecting cuts to world consumption of slightly more than 2 million bales each in 2019/20 and 2020/21, and revised production estimates for Argentina starting with 2017/18 that added an additional 930,000 bales to stocks. World production in 2020/21 is revised downward by 215,000 bales as higher production in Argentina and Tanzania is offset by reductions for Turkey, Uzbekistan, and some smaller countries. World consumption in 2020/21 is revised downward due to changes in a number of countries, led by a 1-millionbale reduction in the forecast for China and a 500,000-bale reduction for India. At nearly 105 million bales, world ending stocks in 2020/21 are expected to be their largest since 2014/15.

Source: USDA June WASDE report

The most substantial global inventories since 2014/2015 when there was enough cotton to make to pairs of jeans for every person on the earth is weighing on the price of the fiber futures.

 

I remain very cautiously bullish on the prospects for the price of cotton at above the 50 cents per pound level but would use tight stops on any long positions and a reward-risk ratio of at least 2:1. Cotton is inexpensive, but the fundamentals remain problematic. The China-US issues remain a bearish factor for the price of the fiber, but the price level remains at a low level. The move above 60 cents for the first time since March was constructive for the fiber futures, but it failed. Optimism in the economy could lead to more garment purchases, which supports the demand for cotton. Cotton has made higher lows and higher highs since early April. The price needs to remain above the 56.50 level to keep that pattern intact.

July FCOJ futures fell since the last report. On Wednesday, the price of July futures was trading around $1.2055 per pound, 4.70% below the price on June 10. Support is at the $1.14250 level. Technical resistance is at $1.3200 per pound. Open interest rose by 0.22% since June 9. The Brazilian currency could eventually turn out to be bullish for the FCOJ futures, and bottlenecks at the ports could create volatility. FCOJ broke out to the upside over recent weeks, but the price failed over the past week as FCOJ futures fell to the lowest level since mid-May. OJ took the stairs higher and is currently on an elevator ride to the downside. Last week I wrote, “The price ran out of steam on the upside above the $1.30 level.” After trading to a peak at $1.32, the price action has been mostly bearish.

All of the soft commodities are rolling from July to the next active month with sugar futures moving to October, coffee, FCOJ, and cocoa to September, and cotton to December futures. Time will tell if the roll period is causing the price weakness in the sector. Open interest has dropped in most of the soft commodities over the past week, signifying that market participants are closing risk positions instead of rolling long positions. The weak price action could end after the roll period.

 

A final note

Selling returned to most markets over the past week. As the fear of new outbreaks of the virus gripped market participants, many likely moved to the sidelines. Keep an eye on copper and oil prices as they can be leading indicators of market sentiment. Continue to expect market volatility but accept it as an opportunity. Approach markets with a clear and disciplined plan for risk-reward and keep stops tight. Look for opportunities in commodities that are at or near the bottom of their pricing cycles to improve the odds of success. If you miss a trade, do not worry, there is always another opportunity right around the corner in volatile markets. Attempt to eliminate emotion from trading and investing as it can cause mistakes. Following short-term trends in the current environment has provided the best opportunities for profits. The many issues facing markets should continue to make increased price variance the norm rather than the exception. Continue to expect the unexpected and you are not likely to be disappointed or surprised.

 

As I wrote over the past weeks, I plan to increase the price of The Hecht Commodity Report in the coming months. However, all of my current loyal subscribers will never experience an increase in their monthly or annual subscription rates. I will grandfather all subscribers at their current rates for as long as they maintain their subscriptions. Thank you for your support.

 

Please keep safe and healthy in this environment.

Until next week,

 

Andy Hecht

 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.